Affordability Index

In the old days before credit was available, to find your affordability factor you just had to tot up your outgoings, and see what you had left to spend on luxuries after your basic requirements had been provided for.

In today's world, your affordability factor is defined as the amount of debt you can afford to take on in relation to your income.

This is usually stated as a multiple of your income. So the bank, on looking at your application for a loan to buy a particular item – car, house, or whatever – would use something called the Affordability Index to look at the amount you would be able to pay back.

But the Index does not tell the whole story. Where it falls down is that even two people in apparently the same circumstances won't really have exactly the same affordability factor, whatever it says on paper.

What you have to spare for your purchase depends entirely on your personal circumstances. You and your neighbour might work for the same company getting exactly the same salary, and might want to buy exactly the same car, but he might be able to afford it while you can't.

This is because, if you are to have a realistic chance of paying back on your loan, your calculations must take account of your true outgoings, not those as decided by some anonymous person in a bank.

Your neighbour might be married with one child and a wife with a part-time job, no other debts and a relaxed attitude to dress style.

You, on the other hand, might not be married and still be looking, necessitating expensive visits to social venues at the weekend. You might have the cost of several new outfits on your credit card, as well as be planning a vacation in Florida in the spring. Perhaps you belong to a tennis club or have been building up a valuable collection of some kind.

You might also have to regularly send money to your parents to help with your younger sister's college education, or have to buy expensive prescription drugs because of a controlled health condition.

You can see from this that the affordability factor is much more personal than it might seem according to the financial pages, and that it is ultimately your responsibility how much you can afford when you go to buy a car or a house, not that of the bank manager, whose interest in your ability to pay at this stage is restricted to a financial table on a page and not to your very real circumstances.

How many credit-seekers actually tell the bank their true position? Often people are afraid to be too specific for fear of not getting the loan they feel they need.

Unfortunately, it is taking what banks were prepared to give rather than what people could truly afford that got the economy into the current difficulties. If you don't want to share in these difficulties you need to pay attention to your own, personal affordability factor.